ELECTRONIC COMMERCE:

TAXATION FRAMEWORK CONDITIONS

A Report by the Committee on Fiscal Affairs,

as presented to Ministers at the OECD Ministerial Conference,
“A Borderless World: Realising the Potential of Electronic Commerce”
on 8 October 1998.

Ministers welcomed the report and endorsed the proposals on how to

take forward the work as outlined within it.
 THE DRAFT MINISTERIAL REPORT
PREFACE

This Report has been prepared by the Committee on Fiscal Affairs of the OECD. The Report has benefited from inputs by the
European Commission and the World Customs Organisation in the area of indirect taxes and from an exchange of views with the
business community.

TABLE OF CONTENTS

ELECTRONIC COMMERCE: TAXATION FRAMEWORK CONDITIONS ........................................................................ 3

I. Introduction ........................................................................................................................................................... 3
II. Main conclusions ................................................................................................................................................. 3
III. Taxpayer service opportunities ........................................................................................................................... 3
IV. The broad taxation principles which should apply to electronic commerce ....................................................... 4
V. The challenge of implementing these broad principles ....................................................................................... 5
VI. The post-Ottawa agenda and process ............................................................................................................... 6

Boxes

Box 1. Taxpayer service opportunities offered by new technologies ........................................................................... 4

Box 2. Broad taxation principles which should apply to electronic commerce ............................................................. 4
Box 3. Electronic commerce: elements of a taxation framework ................................................................................. 5
Box 4. The post-Ottawa agenda .................................................................................................................................. 6
Box 5. The post-Ottawa process.................................................................................................................................. 7

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 ELECTRONIC COMMERCE: TAXATION FRAMEWORK CONDITIONS
A Report by the Committee on Fiscal Affairs

I. Introduction

1. Electronic commerce has the potential to be one of the great economic developments of the 21st Century.
The information and communication technologies which underlie this new way of doing business open up
opportunities to improve global quality of life and economic well being. Electronic commerce has the potential to spur
growth and employment in industrialised, emerging and developing countries.

2. Revenue authorities have a role to play in realising this potential. Governments must provide a fiscal
climate within which electronic commerce can flourish, weighed against the obligation to operate a fair and predictable
taxation system that provides the revenue required to meet the legitimate expectations of citizens for publicly provided
services. Striking the right balance between these objectives is the aim of this Report.

II. Main conclusions

3. The Committee on Fiscal Affairs (CFA) recognises that the technologies which underlie electronic
commerce offer Revenue authorities significant new opportunities to improve taxpayer service and Member countries
are committed to exploiting fully these opportunities (see Section III).

4. The taxation principles which guide governments in relation to conventional commerce should also guide
them in relation to electronic commerce. The CFA believes that at this stage of development in the technological and
commercial environment, existing taxation rules can implement these principles.

5. This approach does not preclude new administrative or legislative measures, or changes to existing
measures, relating to electronic commerce, provided that those measures are intended to assist in the application of
the existing taxation principles, and are not intended to impose a discriminatory tax treatment of electronic commerce
transactions.

6. Any arrangements for the application of these principles to electronic commerce adopted domestically and
any adaptation of existing international taxation principles should be structured to maintain the fiscal sovereignty of
countries, to achieve a fair sharing of the tax base from electronic commerce between countries and to avoid double
taxation and unintentional non taxation (see Section IV). Revenue authorities acting within the OECD or other fora,
must take an active role in encouraging protocols and standards for electronic commerce which are compatible with
these principles.

7. The CFA has been able to reach conclusions on conditions for a taxation framework needed to implement
these principles (see Section V). Intensified co-operation and consultation with business will be an important part of
the process of implementing these principles (see Section VI).

III. Taxpayer service opportunities

8. Revenue authorities recognise that electronic commerce technologies will open up new ways by which they
can undertake their business of administering tax law and collecting tax revenues and new ways by which they interact
with the wider community.

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 Box 1. Taxpayer service opportunities offered by new technologies
Improving service standards

(i) Communications facilities and access to information can be enhanced to assist taxpayers and to improve
response times.

Minimising business compliance costs

(ii) Tax registration and filing requirements could be simplified and norms promoted for the acceptance of
electronic material.

Enhance voluntary compliance

(iii) Electronic assessment and collection of tax could be encouraged. Easier, quicker and more secure ways of
paying taxes and obtaining tax refunds could be facilitated.

IV. The broad taxation principles which should apply to electronic commerce

9. Box 2 sets out the widely accepted general tax principles that should apply to electronic commerce.

Box 2. Broad taxation principles which should apply to electronic commerce

Neutrality

(i) Taxation should seek to be neutral and equitable between forms of electronic commerce and between
conventional and electronic forms of commerce. Business decisions should be motivated by economic
rather than tax considerations. Taxpayers in similar situations carrying out similar transactions should be
subject to similar levels of taxation.

Efficiency

(ii) Compliance costs for taxpayers and administrative costs for the tax authorities should be minimised as far
as possible.

Certainty and simplicity

(iii) The tax rules should be clear and simple to understand so that taxpayers can anticipate the tax
consequences in advance of a transaction, including knowing when, where and how the tax is to be
accounted.

Effectiveness and Fairness

(iv) Taxation should produce the right amount of tax at the right time. The potential for tax evasion and
avoidance should be minimised while keeping counter-acting measures proportionate to the risks involved.

Flexibility

(v) The systems for the taxation should be flexible and dynamic to ensure that they keep pace with
technological and commercial developments.

10. The full application of the principles set out in Box 2 will require further work after the Ottawa Ministerial
meeting.

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V. The challenge of implementing these broad principles

11. The challenge facing Revenue authorities is how to implement the broad taxation principles identified in
Box 2 in a rapidly changing environment. In a number of areas the CFA has been able to reach conclusions on the
elements of a taxation framework that will incorporate these principles. These are summarised in Box 3.

Box 3. Electronic commerce: elements of a taxation framework

Taxpayer service

(i) Revenue authorities should make use of the available technology and harness commercial developments in
administering their tax system to continuously improve taxpayer service.

Tax administration, identification and information needs

(ii) Revenue authorities should maintain their ability to secure access to reliable and verifiable information in
order to identify taxpayers and obtain the information necessary to administer their tax system.

Tax collection and control

(iii) Countries should ensure that appropriate systems are in place to control and collect taxes.

(iv) International mechanisms for assistance in the collection of tax should be developed, including proposals
for an insert of language in the OECD Model Tax Convention.

Consumption taxes

(v) Rules for the consumption taxation of cross-border trade should result in taxation in the jurisdiction where
consumption takes place and an international consensus should be sought on the circumstances under
which supplies are held to be consumed in a jurisdiction.

(vi) For the purpose of consumption taxes, the supply of digitised products should not be treated as a supply of
goods.

(vii) Where business and other organisations within a country acquire services and intangible property from
suppliers outside the country, countries should examine the use of reverse charge, self-assessment or
other equivalent mechanisms where this would give immediate protection of their revenue base and of the
competitiveness of domestic suppliers.

(viii) Countries should ensure that appropriate systems are developed in co-operation with the WCO and in
consultation with carriers and other interested parties to collect tax on the importation of physical goods,
and that such systems do not unduly impede revenue collection and the efficient delivery of products to
consumers.

International tax arrangements and co-operation

(ix) While the OECD believes that the principles which underlie the international norms that it has developed in
the area of tax treaties and transfer pricing (through the Model Tax Convention and the Transfer Pricing
Guidelines) are capable of being applied to electronic commerce, there should be a clarification of how the
Model Tax Convention applies with respect to some aspects of electronic commerce.

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12. The CFA also recognises that there are ongoing developments in areas such as establishing electronic
trading, payment, certification and technical standards and protocols and in the reform of Internet governance where
Revenue authorities both individually and in such international fora as the OECD may need to play a role if they are to
succeed in implementing the tax principles set out in Box 2. In addition, Revenue authorities in co-operation with other
appropriate authorities, will closely monitor developments in electronic means of payment, particularly unaccounted
systems.

13. Recognising the global nature of electronic commerce, Revenue Authorities will intensify their use of
existing co-operative arrangements, explore options for multilateral administrative assistance and examine the
application of the recommendations relating to geographically mobile activities contained in the OECD Report Harmful
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Tax Competition to the electronic commerce environment.

14. The CFA believes that an implementation of the framework conditions set out in Box 3 will enable
Governments to harness the opportunities and to respond to the challenges of electronic commerce and thereby lead
to an internationally consistent taxation approach to electronic commerce.

VI. The post-Ottawa agenda and process

15. The Turku conference of November 1997 initiated work on developing taxation framework conditions for
electronic commerce. The Ottawa Ministerial meeting of October 1998 will take this process further. However, much
remains to be done. This Report has identified the broad taxation principles which should apply to electronic
commerce and identified implementation issues, including how these new technologies offer Revenue authorities the
opportunity to improve the service they provide to taxpayers.

Box 4. The post-Ottawa agenda

Revenue authorities will work through the OECD and in consultation with business to identify concrete substantive
steps that can help implement and extend the taxation framework conditions described in Box 3, and to consider the
feasibility and practicality of those steps, including the following:
Taxpayer service
(i) Developing an international consensus on ways to simplify taxation systems to minimise the cost of tax
compliance, particularly for small- to medium-sized enterprises.
Tax administration, identification and information needs
(ii) Adopting conventional identification practices for businesses engaged in electronic commerce.
(iii) Developing internationally acceptable guidelines on the levels of identification sufficient to allow digital
signatures to be considered acceptable evidence of identity in tax matters.
(iv) Developing internationally compatible information requirements, such as acceptance of electronic records,
format of records, access to third party information and other access arrangements and periods of retention
and tax collection arrangements.
Tax collection and control
(v) Designing appropriate strategies and measures to improve tax compliance with regard to electronic
commerce transactions, including measures to improve voluntary compliance.
Consumption taxes
(vi) Reaching agreement on, inter alia, defining place of consumption, on place of taxation rules and on
internationally compatible definitions of services and intangible property.
(vii) Developing options for ensuring the continued effective administration and collection of consumption taxes
as electronic commerce develops.

1. Luxembourg and Switzerland abstained from the Council recommendation which accompanied this report.

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 Box 4. The post-Ottawa agenda (continued)

International tax arrangements and co-operation

(viii) With regard to the OECD Model Tax Convention, clarifying how the concepts used in the Convention apply
to electronic commerce, in particular:
(a) To determine taxing rights, such as the concepts of “permanent establishment” and the
attribution of income; and
(b) To classify income for purposes of taxation, such as the concepts of intangible property,
royalties, and services, and in particular as regards digitised information.
(ix) Monitoring of developments in, and tax administration challenges presented by, electronic commerce, in the
application of the OECD Transfer Pricing Guidelines.
(x) Improving the use of existing bilateral and multilateral agreements for administrative assistance.
(xi) Considering how harmful tax competition for electronic commerce is to be avoided, in the context of the
Recommendations on geographically mobile activities accompanying the OECD Report Harmful Tax
Competition.

16. The Committee on Fiscal Affairs further recognises that the full application of the principles which underlie
these arrangements will require further work after the Ottawa Ministerial meeting. It also accepts that any taxation
arrangements put in place must be capable of developing as the technological and commercial environment changes.
The Committee welcomes the willingness of business to work with Government in developing further approaches for
the implementation of these principles and looks forward to working with business at both the technological and policy
level. This further dialogue entails a recognition of the place of Revenue authorities as stake holders in electronic
commerce and the validity of their involvement in the development of the standards and protocols which are now
emerging.

Box 5. The post-Ottawa process

To pursue the post Ottawa agenda, Revenue Authorities will continue to:

(i) Carry forward the work programme in the Committee on Fiscal Affairs including monitoring developments
in, and tax administration challenges presented by, electronic commerce and continuing its close
relationship with the European Commission and the World Customs Organisation.
(ii) Intensify co-operation and regular consultation with the business community.
(iii) Develop its contacts with interested non-member economies.
(iv) Report back periodically to the OECD Council and, if appropriate, to Ministers.